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LNG: Desperately Seeking Supply

Several new LNG plants are under construction, but firm supplies remain scarce. Will empty terminals alleviate gas-price pressures?

Fortnightly Magazine - April 2007

in various states. This allows suppliers to bring LNG in and decide when to bring it to market.

 

Fortnightly: What role will financial players have in this market? Will they take positions on cargoes to hedge prices?

Zabriskie: It’s conceivable. Merrill Lynch seems to be the most active of the financial players around LNG, but that may change as more LNG comes into the market. Merrill and other players trade and market a lot of gas volumes, and LNG is a way of putting yourself into new gas fields.

But it’s not about making huge amounts of money handling every volume that flows through. When you are dealing with large customers, you are looking for more scale, more market reach and the ability to do more sophisticated transactions.

Dweck: If you look at who wants to play in LNG—the big investment banks—they need a robust spot market to start making money. At some point, there will be enough flexibility in the system, supply-demand mismatch, and globalization to allow for price arbitrage around the world. That is perfect for traders.

But it doesn’t have to be classic traders. Some small companies will make money on a cargo here and there. For the most part volumes will be controlled by the big players, and in this case it will be the producers—the national oil companies and some of the majors. We will see 70 to 80 percent of the trade being controlled by the big players.

 

Fortnightly: Why aren’t U.S. regulators concerned about competitive access and capacity hoarding the way European regulators are? Why did that issue go away in the United States after FERC’s Hackberry decision?

Dweck: The reason is North America has too much natural gas capacity for any player to influence prices. And there’s less of an energy-security issue here than there is in Europe. Hackberry was designed to provide a financial incentive to build LNG capacity.

Felsinger: I don’t think there is a clear winner here. We currently are building a terminal in Mexico that has a third-party access requirement, and the capacity there is fully subscribed. On the other hand our Cameron terminal, which was the subject of the Hackberry decision, has no open access but it’s not full because the upstream supply doesn’t exist yet. Capacity is driven by what is available in terms of supply.

FERC looked at these projects as if they were a production field, like a basin being drilled, and they decided to let developers charge what the market would bear, as an incentive to get capacity built. As a terminal developer, I want to require users to sign up long enough to justify the investment. With open access, often you can’t get people to sign up for a long enough term to justify your market-based rate. And as an operator, open access can be a scheduling nightmare, trying to coordinate all the different shippers coming in.

Sypolt: We are in a unique position. We provide terminal capacity, storage and transportation services to the market, partly under cost-of-service rates and partly under